Taxation of Pensions Bill

Written evidence submitted by Friends Life (TP 08)

1. This submission has been prepared by Friends Life in order to highlight issues relating to the Bill which may either lead to consumers being unable to access new freedom and choice in pensions or to poorer outcomes as a result of that access. It also suggests how those issues might be mitigated.

2. The rules governing pensions are complex. The new freedoms whilst welcome increase the complexity for consumers further. Whilst some of the details below are quite technical, they may have adverse impacts for a range of consumers. This risk exists, not simply for wealthy people who can afford to pay for significant amounts of professional support, but also for ordinary people with much smaller pots. 

3. Friends Life is the second-largest provider of workplace DC pensions in the UK and manages funds of £117.6 billion (as at 31 December 2013) on behalf of our customers. We want our 5 Million customers to have the best standard of living possible in retirement and propose public policy reform that seeks to deliver that aim.

(i) Pension Transfers – loss of pre A-day protection

4. Background: A large number of pension scheme members have protected (higher) tax free cash sum entitlements resulting from membership of schemes prior to 06.04.2006 (A-day). Others have a protected retirement age lower than the current normal minimum age. These protections are lost on transfer to another scheme other than ‘block transfers’ (where at least two members are transferring simultaneously). Following the Budget 2014 announcements, a transitional easement was granted whereby protections would be retained even if only one person was transferring. This was to enable people in old inflexible schemes to transfer to schemes that will offer the new options. However this easement only extends to 5 April 2015. Beyond that the original block transfer rules will apply.

5. Issue: Friends Life is aware that for commercial reasons many providers will only be able to offer full flexibility through a limited range of products. Many pension scheme members will therefore need to transfer between products if they wish to take advantage of the new flexibility and choice post 5 April 2015. However any transfers made after that date could result in the loss of protected benefits. This seems an unfair outcome and not consistent with the Government’s policy of making pensions flexibility widely available.

6. Mitigation: We believe that the current easement on block transfer rules should extend indefinitely beyond 5 April 2015.

(ii) Short Term Annuity Rules

7. Issue: The short-term annuity rules as they stand are unnecessarily restrictive. They mean a fixed-term annuity of longer than 5 years can only be written within a drawdown arrangement. Writing an annuity product under the drawdown rules adds cost and complexity. The costs need to be reflected in the pricing of the product which in turn makes it a less attractive proposition for consumers. The limitation on the length of a short term annuity is therefore stifling product innovation and leading to unmet consumer needs. In particular a fixed term annuity might be required to bridge a period between cessation of work and the commencement of another pension, such as a defined benefit scheme or the state pension.

8. Mitigation: It is suggested that the short term annuity rules are amended to allow a fixed term annuity of any length. If this is problematic and since the normal minimum pension age can never be more than twelve years ahead of state pension age, a twelve-year maximum (if there has to be a maximum at all) would be a significant improvement for consumers.

(iii) Permissive Scheme Rule Override

9. Background: Pension scheme rules establish the legal framework by which schemes operate and reflect the underlying pension legislative regime. However substantial amendments to scheme rules can be expensive and time-consuming. As a result the Government is introducing a permissive override that will allow scheme managers/trustees to offer flexible access to pensions even if the scheme rules do not permit this.

10. Issue: As it stands, the draft legislation does not extend the override to the following:-

· The reduction in the age at which a member can commute small pensions (from 60 to 55)

· The facility for any beneficiary to take income from an inherited drawdown fund following the death of a member (currently only dependants can do this).

11. Mitigation: We would encourage a review of the permissive scheme override to ensure there are no obstructions to accessing pension flexibility.

(iv) Designation of Drawdown Funds

12. Background: Many existing drawdown pension products are structured so that if new funds are applied ("designated") to a member’s pension drawdown fund, the funds are applied to a new arrangement. However the draft legislation requires that, by default, the new funds must be treated as flexi-access drawdown funds.

13. Issue: This means that a consumer who joined a scheme pre 6 April 2015 and uses their existing capped drawdown facility will not be able to designate new funds to the capped drawdown product and will be forced down the flexi-access route. This in turn will trigger the restricted money purchase annual allowance (of £10,000). HM Treasury has suggested that providers can re-structure products to overcome this issue. We do not believe this will be practical due to system and time constraints and changes to product terms and scheme rules possibly requiring customer consent.

14. Mitigation: We are focussing on other solutions for our customers, but believe it would be better for consumers if the legislation was more accommodating. In particular, Friends Life suggests that pre 6 April 2015 members who have existing capped drawdown arrangements under a scheme should be given the option to determine that any future designations of funds to new drawdown arrangements within that scheme are applied as capped drawdown not flexi-access drawdown. We believe that this would lead to fairer outcomes for consumers.

15. A similar issue arises with designation of drawdown funds to a beneficiary/dependant following death of a member. Legislation requires that the designation must be applied to the originating scheme and must also be applied in the form of a flexi-access drawdown. This approach creates a problem if the product does not offer a flexi-access facility. Friends Life suggests amending the Bill so that funds inherited on death from an existing capped drawdown arrangement may also be applied to a dependant’s capped drawdown.

November 2014

Prepared 18th November 2014